Suncor, Shell both announce unexpected oilsands production decreases

Two of Canada's major oilsands producers are facing lower production targets this year due to unplanned maintenance at their huge open-pit mining operations in northern Alberta.

Oilsands giant Suncor Energy announced Wednesday that corrosion damage in June at its main facility will reduce annual production targets to an average of 220,000 barrels per day, down from an original expectation of 225,000 to 230,000 barrels.

The news comes one day after a similar warning from the Muskeg River mine, part of the new Athabasca oilsands project operated by Shell Canada.

Shell (TSX:SHC) announced late Tuesday that the facility will be at half production "until approximately mid-July" after a mechanical problem on July 1 shut down one of two froth-treatment tanks.

Calgary-based Suncor (TSX:SU) said Wednesday that chlorides in the ore body caused some rusting in the vessels, forcing the company to lower production for about 10 days last month.

"I would refer to this as not-abnormal," said Suncor investor relations vice-president John Rogers. "This would be the normal challenges that you would have up at oilsands."

Suncor also used the opportunity to warn investors that the lower production and higher natural gas prices will boost operating costs to between $12 and $12.50 per barrel for the year, compared to original estimates of between $10.75 and $11.75 per barrel.

The lion's share of these extra costs come from the fact that Suncor was expecting gas costs to average $5.50 US per thousand cubic feet. So far, they've been closer to $6.30 US per thousand cubic feet.

Suncor's open-pit oilsands mining operation uses natural gas as a fuel source in the upgrading process to fire the boilers and generate electricity.

"Natural gas prices have probably held up a lot stronger than people would have thought," said energy analyst Will Lacey of FirstEnergy Capital in Calgary.

But Lacey said the company uses a small amount of gas compared to the oil produced, and with oil stubbornly remaining at very high prices of between $35 US and $40 US per barrel in the past month, "it's still a win."

"So yes, your gas prices are up, but look at your oil price."

One bright spot for Suncor on Wednesday was the company's expectation that its new Firebag project - which uses steam technology to melt bitumen reserves deep underground - is expected to average about 20,000 barrels per day over the second half of this year.

But Suncor also reported that parts of the company's Sarnia, Ont., refinery were shut down for both scheduled and unscheduled maintenance between April 7 and June 1. To fulfil customer contracts, Suncor increased purchases of gasoline from third-party suppliers at market prices, which were above historical averages.

As for Shell's problems up in the northern Alberta oilsands, spokeswoman Jan Rowley said Wednesday the damage was related to a rake-like piece of equipment that helps separate oil from the hot water used in the extraction process.

"Essentially it's a fairly simple fix in the sense of some welding that needs to be done," said Rowley. "But we have to make sure the tank is clean and clear for a person to go in it, and that's what's going to take the time."

The $5.7-billion Athabasca plant, owned by 60 per cent by Shell along with minority partners Western Oil Sands Inc. (TSX:WTO), has had unexpected problems before.

Just weeks into start-up early last year, a fire broke out and caused $150 million in damage and led to several months of unexpected delays.

Shell wouldn't say how much the current problem will cost to fix or how it will specifically affect production targets.

Meanwhile, Canada's third largest open-pit mining operation in the oilsands, the Syncrude Canada joint venture, is enjoying a better year.

The company had its best ever first-quarter in 2004 and June production numbers are in line to meet the year-end target of 86 million barrels.

Last year was much harder for Syncrude, which wrestled with unscheduled production interruptions and maintenance downtime of its own to force a 7.8 per cent production decline.

Shell shares were unchanged Wednesday at $64.32 on the Toronto stock market, while Suncor lost 36 cents to close at $34.20 and Western Oil Sands was off 63 cents at $33.87.

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